Twilio welcomes Andy Stafman, Sachem Head's CEO, to its board of directors. He may contribute to increasing profits.

Company: Twilio (TWLO)

A software and communications solutions company, it provides a cloud communications platform for developers to build, scale, and manage customer engagement within software applications.

Stock Market Value: $10.94B ($60.08 per share)

Activist: Sachem Head Capital Management

Percentage Ownership: 1.81%

Average Cost: n/a

Sachem Head was founded in 2013 by Scott Ferguson, who was the first investment professional hired at Pershing Square. The firm has a history of solid value investing, but it found its activist stride in 2020 with its investment in Olin. Ferguson took a board seat at Olin, the first public company board seat he took in an investment that was not part of a group, and created tremendous value there. Recently, after nominating a majority director slate, Sachem Head settled for three board seats at US Foods. Taking board seats signifies both commitment and contribution, and this philosophy and style is really paying off for Sachem Head.

What's happening?

On March 30, Sachem Head and Twilio reached an agreement, under which Andy J. Stafman, a partner at Sachem Head, was appointed to the board of directors.

Behind the Scenes

Twilio is a communications infrastructure company that generates 90% of its revenue from its Communications business unit and 10% from its Segment unit. The company is renowned for providing messaging, voice, and email solutions to its customers. Twilio went public in June 2016 with $65 million in sales and a $15 share price. Over the next five years, it was a hyper-growth stock in a market that valued growth names highly. It grew at an annual rate of 50%+ through 2021, generating $2.8 billion in revenue and closing its stock price at $443.49. However, after 2021, the revenue growth rate slowed to 8.5%, and it is estimated to be between 5% and 10% in the coming years. Despite being a growth market, it punishes companies when their revenue growth slows. As of Friday's close, Twilio's stock price is $60.08 per share, with $4.2 billion in revenue.

Twilio is still growing at 8.5% per year, but the company has never been profitable despite its level of revenue, even at $4.2 billion. This is a problem for hyper-growth companies, but normal growth companies must show profitability to attract investors. One of the reasons for this problem is the inordinate amount of stock-based compensation Twilio pays, which led to an operating loss of $877 million in 2023. However, there are signs that the company has been heading in the right direction even before Sachem Head's appointment to the board. Stock-based compensation has declined by 15.4% in 2023 from $1.2 billion in 2022, and the company has substantially reduced its headcount by cutting employees by 18% in the past year. Additionally, Jeff Lawson, the co-founder and former CEO, resigned in January 2024 and was replaced by Khozema Shipchandler, who is more financially minded and can help bring the company to profitability. Finally, Twilio announced an additional $2 billion share repurchase authorization and completed an operational review of

Twilio, a company with a strong track record of good intent and successful execution, has the potential for even greater margin expansion and reduction in stock-based compensation. This is a situation where the activist and management are aligned, leading to a quick and quiet settlement rather than a public proxy fight. On March 30, Sachem Head received a board seat for Andy J. Stafman, partner at Sachem Head, and agreed to withdraw its notice of shareholder proposals and nomination of candidates for election to the board at the 2024 annual meeting. We believe Stafman will be a valuable asset to Twilio in overseeing its margin expansion and other plans, but we also expect that he will hold management accountable if they fail to do so. Additionally, we think there is a strong possibility that Twilio gets its top-line growth up as well. Market intelligence and data providers Gartner and IDC still project an industry growth rate in the mid- to high-teens. As the market leader, Twilio should be at the high end of the range.

Twilio has announced that it will not divest its Segment business, despite calls from activist funds Legion Partners and Anson Funds. In connection to this decision, Thomas Wyatt has been appointed as president of Segment, where he previously served as chief product and strategy officer.

13D Monitor, founded by Ken Squire, is an institutional research service on shareholder activism, while the 13D Activist Fund, managed by Squire, is a mutual fund that invests in a portfolio of activist 13D investments, including Twilio.